Salesforce Inc (CRM) — Q3 2016 Earnings Call Transcript

Thanks so much, Ashley. Good afternoon, everyone, and thanks for joining us for our fiscal third quarter 2016 results conference call. Our third quarter results press release, SEC filings and a replay of today's call can be found on our Investor Relations website at www.salesforce.com/investor, and we'll also post the highlights of today's call on Twitter at the handle, @salesforce_ir. With me today is Marc Benioff, Chief Executive Officer; Keith Block, President and Vice Chairman; and Mark Hawkins, Chief Financial Officer. Marc, Keith and Mark will share a few prepared remarks, and then we'll open the call for questions. As a reminder, our commentary today will primarily be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. We may also reference certain unreleased services or features not yet available. We cannot guarantee the timing or availability of these services or features, so we recommend that customers listening today make purchase decisions based on services and features currently available. Some of our comments today may also contain forward-looking statements which are subject to risks, uncertainties and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description with our risks, uncertainties and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-Q. And with that, let me turn the call over to Marc.

Well, thank you, John. And before we start and go into the call, which of course would go through our results, we want to let everybody know that our thoughts and prayers are with everyone in Paris, with all of our employees and all of our customers that have been going through such a horrible situation. And we've also been just especially shaken by our customers, who have lost employees in this horrible tragedy. So we're so sorry, and our thoughts and prayers are with everybody in Paris. Now, I want to go through our third quarter results and give you an update on how we're doing. Also, joining me on the call is Keith Block, who is in New York City, who just finished the world tour there, and we watched him this morning with his team. Keith, are you there? Can you hear us?

I am absolutely here, Marc.

Fantastic. Mark Hawkins, our Chief Financial Officer, and I feel it's important to discuss another impressive growth quarter for Salesforce. Based on these results, we are on track to exceed $6.6 billion this year, which is unprecedented for any enterprise software company. I am excited to announce that we anticipate generating more than $8 billion in revenue, with a high end forecast of $8.1 billion for next year. This is truly remarkable, and we are thrilled with the results of the third quarter and our prospects for the fourth quarter and the coming year. We’ve been aiming for the $10 billion mark, and Salesforce will become the fourth largest software company in the world next year, being one of the few to achieve $10 billion in revenue. As we reach this position, we have our sights set on the third spot as well. As many of you expect, Salesforce will indeed be the fourth largest enterprise software company globally next year, trailing behind only Microsoft, Oracle, and SAP. Our impact on customers and the industry is significant, largely due to our dedicated team of nearly 20,000 employees focused on customer success. Looking at the third quarter results specifically, our revenue climbed to over $1.7 billion, reflecting a 27% increase in constant currency compared to last year—one of the strongest performances among the top ten enterprise software companies. Salesforce continues to lead the growth among these companies, and we're thrilled with our 27% growth. Our deferred revenue also grew to more than $2.8 billion, marking a 30% increase in constant currency from last year, which is impressive for our scale. Additionally, the total dollar value of booked business on and off the balance sheet is now over $9.5 billion, which positions us well for the future. Alongside this strong topline growth, we also improved our non-GAAP operating margin by 221 basis points year-over-year. While we commit to being the fastest growing enterprise software company and delivering outstanding topline numbers, we are also focused on enhancing profitability, as evidenced by this year's results. To be clear, Salesforce is the only software company selling billions in CRM, and we sit at the core of the digital transformation every company seeks in the 21st century. During the quarter, I spoke with hundreds of CEOs globally. Interestingly, when meeting with them, their focus isn't on discussing cloud, social, or mobile. Rather, they want to discuss their customers, their topline, and strategies for growth—this is the exciting trend of customer evolution we are witnessing. We're focused on engaging with our customers to help them connect with their own customers in innovative ways, drive their growth, create personalized customer journeys, manage their businesses through their phones, and make smarter, more predictive decisions. One of those customers is us, and by the end of this quarter, I was truly impressed. I was using Salesforce One, which now has nearly a million active users. My IT team at Salesforce developed several new apps that were automatically installed on my phone because of my use of Salesforce One. I utilized this remarkable Sales Forecasting app, where I could easily interact with images of all our global sales leaders, navigating through our pipelines and forecasts. It was incredible to manage my business from my phone and maintain that connection with my customers. Today, more than ever, that kind of customer connection is crucial. As a CEO, I can attest that it keeps you in tune with your business and what is genuinely happening. Well, I think that that was definitely evident for everyone who attended Dreamforce. And if you came to Dreamforce, you saw the biggest software conference ever and you also saw not just a huge amount of customers but we really rolled out incredible new innovations, which is enabling my own personal experience with Salesforce product, but for hundreds and thousands of Salesforce customers who are using these incredible new products like our new Lightning platform, which is amazing. You have the ability to build an application and run it on any device on a phone, on a tablet, on a PC, it transcends operating systems, it transcends devices and we have rebuilt our sales, service, and our core community products and all of our core platforms on this amazing new Lightning platform. And when it shows up, it's nothing like I've ever seen, which gives you this incredible modern experience in a mobile environment. And then of course, we also added SalesforceIQ to bring machine intelligence to that. We introduced our IOC cloud, even bringing it into the Internet of Things, and maybe you can transform that Internet of Things into the Internet of Customer. Well, of course, we also have our analytics cloud with our new Wave app, and there is just still much more. And I'll tell you that walking around Dreamforce, it was just blown away with our ecosystem, and then hundreds and hundreds of companies who have built on this platform and who have made so much happen. But I guess what I'm most proud of is that during Dreamforce we also held the largest book drive ever, collecting over a million books for schools. We also raised over $10 million for the UCSF Children's Hospital in San Francisco and Oakland, and I'll tell you that I want to thank all of our partners and our customers for helping us achieve those numbers there, because it's really, really awesome. Well, I'll tell you it's been an exciting few months here at Salesforce, and I would say that nothing is more indicative of how Salesforce is delivering customer success and how this Lightning platform is being adopted. In the third quarter we delivered more than $259 billion transactions, which was up 63% from a year ago. That's 4.1 transactions every single business. There is no other customer platform coming close to that level of usage. And while our transactions continue to skyrocket and our customer success continue to skyrocket, we committed also to reducing our carbon footprint. And the environment is a key stakeholder for us and we continue to show how the multi-tenant cloud platform is 98% more efficient than on-premise software. And we're helping customers avoid a countless amount of carbon each year through our unique architecture of cloud computing. Well, we have to do more, and we've made significant commitments to achieve net-zero carbon emissions by 2050. And over the next several weeks, in Paris at the COP21 Conference, we'll be making more announcements on how Salesforce is focused on the environment. Well, as you're about to hear now from Keith, we're working with some of these great customers to deliver a fantastic result to accelerate the digital transformation. And I guess there was no stronger evidence point in the analyst community than Gartner's 2016 CIO Agenda, which I am sure a lot of you follow as I do, and they found that Salesforce is rated as the number one accelerator by the majority of respondents and received the highest digital acceleration score. Out of 30 vendors, Salesforce was at the top. And just Gartner did an amazing job on the CIO Agenda Report and we haven't had a chance to look at that, I would. Well, anyway, let's hear from Keith, he's had a huge day already in New York. I can see him on the monitor here, so he's still there, which is good. And so Keith, tell us how did New York go today?

Thanks, Marc. We had a great day in New York with over 8,000 people registered. So it was a terrific event and well-received and the customers are very, very excited about our messaging.

Well, Keith, you know what, I think everyone on the call would love to talk to you now about how your experience was in the field. We obviously had a great Dreamforce. We saw more customers this year. I know you and I this year have been in front of more CEOs and CIOs I think ever in our entire career, and everyone wants to talk about how to transform the customer experience. I don't know a company today that isn't reviewing on how to transform their customer experience and how to not get, I guess, a lot of them say, they don't want to get Uberized out of the world. But some of them I think are don't want to get Postmated out of the world, because I just ordered my lunch on Postmates here in San Francisco. So maybe you can tell me your experience there in New York.

All right. So thanks, Marc, I appreciate it. And it's great to be here, and obviously thanks to everybody for joining the call. As Marc had indicated, this was just a terrific third quarter. And one that I would characterize, I think we all would characterize, as one of the most memorable exciting quarters that we've had here at Salesforce. And we heard it today and we continue to hear, the message from our customers is very clear. And while many of our competitors are struggling quite frankly to catch up to the cloud, Salesforce is taking customers and forecasters forward into the age of the customers. We are squarely in this age of the customer. Marc and I just talked about this, but I had the opportunity to kick off our Salesforce world tour here in New York. Again, over 8,000 people registered for this event. And people want to be here, both customers and prospects, companies like American Express, and Mattel, and Western Union and a lot of customers through a variety of industries about how they are reinventing their futures and leveraging Salesforce. And as I speak to you, the top customers around the world, and Marc is exactly right, many of them are CEOs, which is terrific. There is a constant theme that keeps coming through here, and that is that we are clearly in this age of the customer and the time of cutting your way to prosperity is over. And when you think about it, the agenda for every CEO in the world is growth. And the reason why CEOs are coming to us is because they've seen Salesforce as that catalyst for growth, and we are also quite frankly a catalyst for customer success. So whether it's a company of all shapes and sizes, whether it's a business model with B2B or B2C, large company or small company, regardless of the industry, these CEOs are really looking at us now to be their trusted advisor and really help them define their new customer strategy, their digital strategy, their engagement model in really new ways to transform into customer companies, and that's just become super, super important to them. And all of this has translated into some of the most exciting deals that we've done in our industry. We had another huge quarter of fantastic wins. In fact, the total number of our large transactions in Q3 was up significantly compared to last year in terms of value. Our relationships are becoming bigger, they are becoming broader, they are becoming more strategic and deeper. And we are now working with some of the world's greatest brands, and this is a far different roster of companies that we have historically worked with. A big part of that success quite frankly has been our industry strategy, and we talked about this on many calls, but this is about our ability to speak the lines of customers and to understand their business problems and drive a level of innovation and a point of view. And it's become a regular part of how we engage with customers of all sizes, from the smallest to the largest of enterprise. And it's really proving out in our results. And I'll give you a few examples. Certainly, there is a company that we've all heard of called, General Motors. They have 125 million cars on the road. They have a significant vision for the connected vehicle. And in Q3, they selected Salesforce to connect drivers, the cars, merchants and retailers to bring a connected vision, a great experience to life. And with the push of a button, drivers are going to be able to instantly connect with the OnStar advisor and retailers and merchants, and it doesn't matter where they are, and they're going to get real-time information. And this is an example of a company GM that is really embracing the opportunity around the Internet of Things. And we are really excited about working with them. We are entering the holiday season, as we all know. We're seeing a lot of traction in retail. And I'm thrilled that we closed the largest marketing cloud deal in the company's history with a very large retailer in Q3. They are taking things to the next level by personalizing the shopper experience across every single channel. We're going to be at the core of their omni-channel consumer engagement strategy, and they will be able to create a very personalized and predictive one-to-one relationship with customers at every single touchpoint, which is really compelling. And they're also going to be able to anticipate what the next step is and what the next action is, and what customers might need and relevant suggestions at exactly the right moment. So we are very excited about that new partnership. Another great win was with AECOM. If you're familiar with AECOM, they design, build, finance and operate some of the largest and most iconic infrastructure projects around the globe, including here in New York the World Trade Center and the Tokyo 2020 Olympic stadium, which we're very excited about, as are they. They have nearly 100,000 employees in more than 150 countries. And we are all thrilled that AECOM has decided to move their entire company to our platform. In finance and services, which is certainly a key focus area for us, we have expanded our relationship with American Express, one of the great brands in the industry, a company that has been delivering world-class service for more than 160 years. In the quarter, American Express selected Salesforce to bring their sales and marketing and product teams together to collaborate and coordinate, so that they can further transform their customer experiences for their business payments. Super excited about that new relationship. And what's interesting about that deal is that Amex and so many others continue to use our Ignite process to really reconceptualize their futures. And this is a very unique solution selling approach that is all about the art of the possible. We have increased our Ignite tenfold in the past few years. It is a standard part of our selling motion. It is one of the best investments, quite frankly, that we've made and it's having a significant impact with our customers. In fact, one of the leading high-tech manufacturing companies in the world also engaged with us in the quarter and in Ignite. And that resulted in a significant eight-figure deal, which we're very, very excited about. And right before Dreamforce, I think as we all know, we introduced our first vertical-specific product line with Health Cloud and Financial Services Cloud. We're very excited about the growth opportunity for these clouds. The interest has been very strong. We're excited about their future. And these products are really translating our incredible core technology into the language of the customer, which is part of our industry strategy. And we are cultivating an excellent ecosystem of partners for all of these solutions. So we're excited about that as well. International continues to be a cornerstone of our growth strategy. And in the quarter we extended our relationship with a company called AB InBev. They've been in the press a lot recently. They are one of the world's top five consumer product companies. They've standardized their collaboration with us globally, and that's after a successful relationship start in Europe. And now they're going to reinforce the consumer-centric digital approach and innovation efforts, leveraging our products as well. So we're excited about that. And AB InBev joined ABB and Barclays, GlaxoSmithKline, Telefónica, Virgin Media, and so many great leading companies in Europe, again who selected Salesforce in Q3. In Asia-Pac, we continue with our strength. We closed deals with Australian Post and Syntel, Commonwealth Bank of Australia, Toyota, and the list goes on there. So I really couldn't be more thrilled about the success we're seeing internationally. We continue to invest in our selling capacity, our service capacity, our data centers, our offices, our partners, all to drive growth and to make our customers successful. Another area where we continue to make progress quite frankly is with our partners in our ecosystem. And I'm very proud of the results we're seeing with regional and global systems integrators. Our partner certifications in the quarter were up more than 40% from a year ago, which is outstanding. And with all of our global SIs growing at an even faster rate, this is a great indicator that the most important consulting partners and firms in the world are betting their business and their customers' business on Salesforce. So we have firms like Accenture and Deloitte, PwC and Cap Gemini, they're all increasing their Salesforce practices. They are walking arm-in-arm into the C-suite with Salesforce. And in addition, our App Cloud continues to be the platform of choice for innovation by our ISVs. And a great example of where our industry strategy works hand in glove with our ecosystem strategy, a firm named Accenture we're all familiar with, selected Salesforce as a partner to transform the front office of consumer goods companies around the world. So they will be bringing their Accenture CAS solution onto the Salesforce app exchange, which is a great endorsement of our platform and critical to our joint industry strategy. So in closing I want to say, thank you to all of our customers and thank you to all of our partners for their trust in us and their confidence in us. And I'd also like to thank our incredible employees for their outstanding execution in the quarter and this unrelenting dedication to customer success. And right now we are firing on all cylinders, our investments in the industries, our partner ecosystem, our international regions is all paying off. And we have excellent momentum coming out of Dreamforce. And really Marc, based on what I saw in New York this morning, we are very well positioned for a very strong finish to FY '16, and we're looking forward to a historic close this year.

I will tell you, Keith, we couldn't be more proud of you and your sales team, so congratulations. It's so exciting. We really appreciate everything that you're doing. And Keith, I'll tell you, I watched the Sales Cloud Keynote after your keynotes today and Accenture was the speaker with Sarah Varney during the Sales Cloud Keynotes, and what was really interesting, they talked about how not only are they doing this incredible partnership, building products on our platform to sell to their customers, but that they have rolled out 25,000 users internally. And their speaker today in New York, on the video I watched, talked about what he learned working with Salesforce is that the key to success is to be bold and go fast and just go do whatever you can and just go as much, much faster than any other platform he had ever worked with.

I had dinner last night with 40 of our top customers and prospects, and I sat next to the CEO of Accenture, North America. We had an excellent conversation about our partnership and relationship. Accenture has a culture that embraces transformation and understands what their customers are looking for. Because of this, they want to partner with a company like Salesforce that grasps growth and transformation. This creates a strong connection between our two firms. We're seeing significant interest in the market, which is why Accenture was eager to establish a partnership in the consumer packaged goods space. They are our number one partner and continue to promote our message to our shared customers.

Well, it has been impressive to see, Accenture has definitely jumped into cloud computing and the social, mobile and IoT faster than any of the other systems integrators. Even though they're largest, they move the fastest. And now to see them deploy internally and also build these solutions on the platform is still exciting, so congratulations on that, as well, Keith. And let's go over to Mark Hawkins and hear about the numbers. Mark?

Fantastic. Thank you, Marc. We delivered another great quarter with consistent execution and balanced growth across all of our products and geographies. And our results this quarter set us up for a strong finish in FY '16, as discussed, and another solid year in FY '17. Third quarter revenue was $1.71 billion, up 24% in dollars and 27% in constant currency. Foreign exchange continues to impact revenue with a year-over-year headwind of $40 million and a sequential headwind of $6 million. We continue to see strong year-over-year constant currency growth in all of our geographies with the Americas growing 27%, EMEA growing 28%, and Asia-Pac growing 25%. Each of our clouds delivered outstanding year-over-year growth on a dollar basis with Sales Cloud growing 10%, Service Cloud growing 38%, App Cloud and other growing 40%, and Marketing Cloud growing 29%. Dollar attrition for the third quarter excluding Marketing Cloud was approximately 9%. From a bottom-line perspective, we delivered another quarter of improving profitability. In fact, we have now increased our year-over-year non-GAAP operating margin for the sixth consecutive quarters, up 221 basis points over Q3 of last year. Our Q3 non-GAAP EPS was $0.21. Non-GAAP EPS includes approximately $0.01 from our lower than anticipated non-GAAP tax rate, which I'll discuss more in a moment. Our great topline and bottomline performance in Q3 drove another solid quarter of cash generation with operating cash flow of $118 million. This was slightly down year-over-year about 4%, while operating cash flow year-to-date was up 37% compared to the same period over last year and that's now up to $1.2 billion year-to-date, which is very exciting. Marc, it took us 15 years to get to $1 billion in cash flow and we did it in the first two quarters and now we're topping it, so we're really excited about that. For the full year, we continue to anticipate operating cash flow in the growth of 24% to 25%, consistent with our prior guidance and our revenue growth operating margin framework. Third quarter free cash flow defined as operating cash flow plus CapEx was $38 million, down 23% over the last year. Again, year-to-date free cash flow was $937 million, up 47% over the first nine months of the last year. Looking at billed deferred revenue, we delivered growth of 28% year-over-year. Excluding an FX headwind of $41 million, deferred revenue grew 30% over last year. On a sequential basis, deferred revenue was impacted by an FX headwind of $7 million. In the quarter, 79% of the value of all subscription and support related invoices were issued with annual terms compared to 73% in Q3 of last year. This is a bit higher than anticipated and translated into approximately 2 percentage points of deferred revenue growth in the quarter. Moving on to guidance. With our great performance in the third quarter, we are raising our full year revenue guidance by $25 million. We now anticipate revenue to be $6.64 billion to $6.65 billion for 24% growth year-over-year. The guidance continues to include an FX headwind of approximately $175 million. We are also raising our full year non-GAAP EPS to $0.74 to $0.75 or $0.03 at the high end of the range, which is approximately $0.02, as a result of our outperformance and about $0.01 as a result of our lower full year non-GAAP tax rate. Now, let me take a minute to discuss our non-GAAP tax rate. We are adjusting our projected full year non-GAAP tax rate to 35.5%, in light of a recent Altera tax opinion. You may recall that we began to compute and use the fixed long-term non-GAAP tax rate during FY '15, and as we said, we would reevaluate this rate annually and/or as the situation arises where we need to reevaluate that, and that is exactly the case as it relates to Altera, and that's just the situation where we needed to true that up. And we'll continue to reevaluate that and give you updates as we need to. For Q4, our full year guidance implies revenue growth of approximately $1.782 billion to $1.792 billion, non-GAAP EPS of $0.18 to $0.19 and billed deferred revenue growth of approximately 23% to 24%. And as you heard from Marc, we are pleased to be initiating fiscal revenue guidance of approximately $8 billion to $8.1 billion for year-over-year growth of 20% to 22%. In fact, FY '17 feels very similar to last year, as we continue to deliver strong growth at scale. And we will provide additional details about our outlook for FY '17 on our fourth quarter call in February. To close, we had a strong third quarter and we are well-positioned for a great finish to FY '16 and to deliver another solid year in FY '17.

Great. Thank you so much, Ashley, and thanks so much everyone for joining us. Sorry, we couldn't get to all your questions. If you have any follow-up for us, you can reach out to us at investor@salesforce.com. And if you missed the world tour in New York today, you'll have multiple other opportunities. We'll be in Tokyo and Los Angeles in December, in Minneapolis, Atlanta, Houston, Dallas, and Seattle. And so if you'd like to hear some of these great transformational stories of how Salesforce is changing customer experiences, you can tune into that. Otherwise, we look forward to giving you an update on our progress in Q4 in February.